Times change! And when it comes to the world of Workers Compensation no statement rings truer.
I remember a time when insurance carriers relied on their underwriting departments to be the knowledge base of their company. When line underwriters were the backbone of the insurance industry. When carriers depended on the knowledge of their individual underwriters and underwriting teams to guide a successful risk selection process. Followed up by knowledgeable workers compensation claims professionals properly processing claims as required under individual state statute. But I’m old and yes, things change.
Today’s successful workers compensation insurance carrier is chocked full of actuarial inclined workers with more collective data to analyze with more powerful computers to get the job done than were used during the entire NASA moon launch program (just guessing.) I’m pretty sure that most workers comp carriers believe they have a handle on every little part of the profitability equation and that nothing that occurs hasn’t been planned. It even seems that every workers compensation claim that happens should somehow have been predicted to happen at a specific date, time and type of injury. When something out of the ordinary occurs it throws the entire process amuck! That something out of the ordinary usually takes the form of a loss of profitability.
Leakage audits are nothing new. They are, in a nut shell, a concentrated effort to identify the causes of un-predicted loss of revenue. Insurance carriers conduct internal audits on a variety of issues on a regular basis. Most of these have some specific purpose. For example an underwriting file audit. This is where company employees will review, at random, client underwriting files with the purpose to verify that company procedures were followed, that the client profile falls within the company acceptability guide and that all i’s were dotted and t’s were crossed. Underwriting file reviews are usually conducted with the purpose of verifying compliance with rules established by a governing authority like a state insurance department or perhaps to verify that re-insurance treaty requirements are being met.
Internal audits are also conducted on claim files. With similar goals to an underwriting audit, a claim department audit will focus on specific details found within individual workers compensation claim files to determine compliance with company established standards.
Leakage audits are a special type of audit conducted by an insurance company usually through an independent consulting firm like our company, Workers Compensation Consultants! You may find they are sometimes combined with compliance audits but, unlike compliance audits, are designed to identify key areas of lost opportunity. In other words, when conducting a leakage audit, the consultant is looking for problems in the methods established by the insurance company that create a loss of profitability or loss of opportunity for profitability.
For example, a claim department leakage audit may identify that certain practices followed by a company claim adjusters are allowing claims to be deemed compensable when in fact they should not. This may occur when claimant statements are not taken or when witnesses to a reported accident are not properly interviewed. Another focus of conducting a claim department leakage audit may be to identify potential loopholes in company processes that expose the insurance company to future costly litigation.
Underwriting departments are not immune to leakage. Think about it, who traditionally sits as the gate keeper to an insurance company? Who is it that allows coverage to be placed on a new client? Well the answer used to be an underwriter. But with today’s automated underwriting systems and actuarially driven insurance carriers, underwriting department leakage may just as well be broadened to include company actuaries.
Traditional areas of underwriting leakage include; Incorrect application of classification codes – where an underwriter allows the use of a lower rated code when the proper code for the risk would be higher; Improper methods of applying rating or classification rules – allowing errors that outside entities may use to bring suit against the carrier; Inappropriate application or incorrect interpretation of rules regarding endorsements included as a part of the policy; Allowing untrained underwriters to make inappropriate decisions regarding premium producing, cancellation and non-renewal areas of a policy – all leading to fines from governing authorities or possible legal action; Failure to follow underwriting file requirements and verification of information on submitted applications for coverage.
Unlike those internal company audits, claim department and underwriting department leakage audits are commonly performed by independent, outside consultants. After all, it’s the independent consultants look that provides useful information for insurance company management seeking to improve company performance and plug the holes leaking money!
Hope this helps you out and thanks for reading!